Why is there a huge difference in expense ratios between direct and regular plan? For example, Franklin India Prima Fund regular plan has expense ratio of 2.31 per cent and 0.82 per cent for the direct plan. Difference of 1.49 per cent can make a huge difference when we consider the compounding effect. Is it created by AMC for advisor/broker to earn money?
- Gautam Redmi
It seems, you have been away for a long time. Direct plans were introduced in 2013. Investors can invest directly with a mutual fund and save money on commissions and promotions. This will result in, as you have observed, lower expense ratio for the fund, which will make a big difference to the returns over a long period. However, an investor should opt for direct plans of schemes only if he can take care of his investments on his own - that is, choosing a mutual fund scheme, tracking it, buying and selling, etc. Otherwise, he should opt for an advisor and invest in regular plans. Yes, regular plans will have a higher expense ratio as they pay commissions to advisors and spend money on sales promotional activities.
For more, read: All About Going Direct.
This article was originally published on December 18, 2015.
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